Inflation Expectations as a Policy Tool?

68 Pages Posted: 13 Jul 2018 Last revised: 25 Sep 2021

See all articles by Olivier Coibion

Olivier Coibion

University of Texas at Austin

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Saten Kumar

Auckland University of Technology - Faculty of Business & Law

Mathieu Pedemonte

Inter-American Development Bank (IDB)

Date Written: June 2018

Abstract

We assess whether central banks may use inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms’ expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households’ nor firms’ expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers can pierce this veil of inattention through new communication strategies. At this stage, there remain a number of implementation issues and open research questions that need to be addressed to enable central banks to use inflation expectations as a policy tool.

Suggested Citation

Coibion, Olivier and Gorodnichenko, Yuriy and Kumar, Saten and Pedemonte, Mathieu, Inflation Expectations as a Policy Tool? (June 2018). NBER Working Paper No. w24788, Available at SSRN: https://ssrn.com/abstract=3210442

Olivier Coibion (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Saten Kumar

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Mathieu Pedemonte

Inter-American Development Bank (IDB)

1300 New York Avenue NW
Washington, DC 20577
United States

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